I have decided to do a series of posts, ten in all, exploring the concept of living debt free. This is the second post in that series.
Click here to read Living Debt Free – Part 1.
Planning For Future Major Purchases
If we are going to live debt free, we have to have a solid plan for making future major purchases. It’s never good enough for us to simply save money and hope that we’ll have enough when we need to buy something. Instead, our goal is to be prepared – forward thinking – and ready for when those major purchases need to be made. Here’s our process.
The Conversation
Once every three months or so, my wife and I will sit down and talk about our financial future. We will discuss any major purchases that we plan to make, and when we plan to make them. The goal of these conversations is to brain-storm – so that we can create a financial timeline and a better, more useful, monthly budget.
The Financial Timeline
Each purchase that we plan to make is assigned a date of purchase on our financial timeline. This is my super-nerdy way of saying – we have a calendar and we write down when we want to buy stuff. This helps us know how much we need to save, how quickly we need to save it, and exactly what we’re saving for. For a goal-oriented nerd like me, the financial timeline is a super-awesome motivator.
We also use the financial timeline to map-out our savings plan. For example, if we want to purchase a new washing machine 2 years from now, we have 24 months to save for the new washing machine. We divide the estimated price of the washing machine by 24 – and that’s how much we save each month. Each future purchase becomes a budget category. This part of the planning process is pretty simple, but things can quickly get a little more complicated.
Let’s assume we want to purchase a newer car in 4 years. We then have a choice. We can divide the estimated purchase price by 48 and start saving now – OR – we can wait until we have purchased the new washing machine, 2 years from now, and then start saving for the newer car. Income is finite and there’s only so much of it that can be saved. Living debt free requires that we make these decisions, of how much to save and when to start saving, over and over and over. That’s why having The Conversation – and having it regularly – is so important.
The Monthly Budget
Each item on our financial timeline becomes a budget category. Each category is funded – with the money electronically deposited into our ING Direct High Yield Savings Account. When we are ready to spend the money in any category, we simply transfer the necessary amount to our ING Direct Electric Orange Checking and we are good to go. We can use the free bill-pay feature, get cash from an ATM, or use our debit card.
For us, the key to remaining debt free is to build up category-specific savings. By assigning each dollar of our savings to a specific category, we give each dollar a purpose. By minimizing the amount of unassigned-savings, we are able to better resist impulse spending. And, as you know, impulse spending is the arch enemy of the debt free life.
I hope you’ve enjoyed the second post in this series. If you haven’t already done so, please subscribe to No Credit Needed, leave comments, follow me on Twitter, and come back soon. Rock on!
Planning for future major purchases is a must. I cringe when I see youngsters on Facebook talk about how they have $xx in the bank account, and still go out every weekend to have fun.
With planning, you can easily pay off your home without the need of a mortgage in several years. Just takes some patience.
Your post is truly helpful, I would say YES planning for future purchases is really needed in order to avoid any problems. I will give category-specific savings a try. Thanks.
Despite being frugal and putting money away for a rainy day, I have failed in the past to do the necessary planning for future purchases. Therefore, my money was tied up in less liquid assets that I didn’t want to sell off (thereby taking the tax hit) when it came time for big purchases.
I have recently learned that it is much wiser to forecast your needs and put away a little every month. I have embraced “Smarty Pig” to assist with this process and feel all the wiser.